So Trump is a hypocrite: what’s new?

Featured Image credits: The White House

Not to say that we in the UK don’t have our own share of clownish politicians, but the phrase “hypocritical Donald” isn’t exactly an oxymoron. How about the fact that he’s pro-life and yet not disclosing how many abortions he’s paid for (hint: he should be saying zero). Or what about when he criticised Obama for playing golf while in office before playing even more golf himself in the same time period while in office? Regardless of all these, though, I’m here to talk about quite a recent example of hypocrisy from the 73-year-old’s Twitter. The tweet, from yesterday, read:

“German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!”

Where to begin with this? Trump’s rationale (presumably, at least; do we ever really know?) is that Draghi’s statements that the European Central Bank (ECB) could enact stimulus measures (including cutting policy rates further) in the future adds further negative pressure on the euro. This in turn makes US manufacturing uncompetitive with respect to that of Europe, and thus has the potential to depress the US economy through reducing exports and increasing imports. This is because the dollar appreciating vis-a-vis the euro makes exports from the US more expensive for foreign buyers, and makes imports into the US less expensive for US buyers.

While this train of thought is logical, it ignores the myriad of other reasons why the ECB would try and cut rates. Growth in the Eurozone has been flagging, due to, among other factors, the risk of a disruptive Brexit and a global trade war; OECD projections state growth as most likely around 1% for the year. While I’m not denying that a part of Mr Draghi’s army of reasons to act this way would be to add downwards pressure to the euro, Occam’s razor suggests that the currency argument isn’t the primary reason why Draghi is considering such action. Moreso, it’s not as if what the ECB is doing is unconventional; monetary authorities have been using interest rates as a tool to manage the economic cycle for decades.

However, it is also true that Trump never explicitly said that the intention was to depreciate the euro; he merely said it was unfair to the United States. Does this absolve him of any blame for the statement?

I don’t think so, for the following reason: Trump has repeatedly maintained his opposition to the mildly hawkish tone of the Chairman of the Federal Reserve, Jerome Powell, with respect to interest rates. If it’s so unfair that the ECB may cut rates in case of future economic stagnation, then why is it not also unfair for the Federal Reserve to cut their interest rates instead of raising them? The world Trump lives in, where interest rates are a primary tool of exchange rate warfare, is a world where there is every action is an act of hostility. If Trump really believes his own tweet, he should expect a barrage of European criticism once he inevitably again tries to persuade Powell to halt his hawkish tone on rates.

It’s not as if Draghi is actually cutting rates right now either; his point is that they remain a tool in case Eurozone growth slows even further, a perfectly rational position to take. Draghi’s speech was somewhat reminiscent of his “whatever it takes” speech in 2012, which is widely credited for saving the euro. If Trump means that even suggesting that interest rates should be used to curb a potential recession (or decrease in growth) is unfair, he means that a central banker looking out for the interests of those he or she governs (as Draghi did in 2012) is unfair as well. In this case, one has to ask: isn’t all this “America First” nonsense that Trump keeps spouting wildly unfair as well?

The fact I’ve read so deeply into what is probably an off-the-cuff tweet from one of the most volatile Presidents in US history is a carry-forward from previous administrations. A tweet (or any sort of official statement from the President) used to be taken seriously by all, and was almost always well crafted and thought out. It speaks volumes about Trump that more and more, his tweets are beginning to look like jokes, and the markets his personal see-saws to tip up and down as he wishes. I suppose Trump being a hypocrite isn’t exactly a groundbreaking observation, but the blatant ignorance that comes with a tweet such as this is something that I felt I had to comment on.

Why the Dow’s rise isn’t a sign of President Trump’s great policy for me

The featured photo is licensed under the Creative Commons Attribution-Share Alike 2.0 International license, and was taken by Gage Skidmore.

Characteristically, President Trump has recently been all about showing off how well he’s performed in his first year as one of the most powerful people on Earth. While for myself and some others his first year has been unsuccessful (to put it mildly), Trump is dead set on proving us naysayers wrong largely by using the sustained rise in the Dow Jones Industrial Average (an index showing how shares in 30 of the US’ largest companies have traded over periods of time) during his presidency. While at first glance well-performing large companies may seem to indicate that the economy as a whole is performing well (which it is currently), in this article I will make and support two propositions: firstly that the current US economic boom is unsustainable (assuming the Dow is a good measure of current economic performance), and secondly that the Dow, either way, isn’t a very good reflection of how the economy is doing.

Looking more in depth at our first strand of argument, while business spending increases have allowed the US economy greater than 3% economic growth over the past two quarters, the Trumpian tax cuts for corporations and the wealthy run the risk of actually increasing the American budget deficit (exactly the opposite of what many Republican deficit hawks campaigned for). Politically, this becomes very difficult for the Republicans to justify, but more than that, the fact that that according to the Tax Policy Centre Trump’s plan actually would hurt the lower 50% of income earners represents a decrease in future consumption and thus a decrease in US short run (and long run if firms then stop investing) economic growth arising from this set of policies. Essentially, then, the point I’m trying to make here is that hurting the little guy may boost growth in the short term, but in the long term when real after-tax incomes and consumption fall, the economy might not be doing so great. This is because the rich consume less than the poor for an equal addition to income, so even though the rich get richer, it might not actually boost consumption and growth all that much. So Trump can be happy with the buoyant Dow and economy for now, but he should know it may not last long.

Taking the issue from another perspective weakens Trump’s Dow-focused point further. If we look at who the Dow Jones’ rise actually helps, we see that it serves to increase income inequality further. A NYU report in 2013 showed that the richest 20% of Americans owned 92% of stocks, indicating that the benefits from the Dow’s rise are not equally distributed. Even if we look at the Dow’s rise in isolation as a sign that the economy is doing well, we still see numerous faults with the theory. By seeing what the Dow actually is, and how it may have been affected by recent news, we can see that it may have been buoyed by Trump’s plans to cut business taxes and not actually an improving economy. Within this plan, Trump has also presented changes to the individual tax code that disproportionately benefit the wealthy, but although the American middle and lower economic classes may not actually benefit from his plans, the Dow is rising. This one example shows the divorce that may exist between the performance of large companies and the economy in general; income inequality worsens the economy through decreasing growth, but tax cuts boost large corporations’ after-tax profits. Hence, through this example we can see that the Dow Jones may not be able to accurately gauge US economic performance, putting another dent in the logic behind some of Trump’s recent tweets.

To summarise and conclude, I have established in this piece why I think that President Trump using the Dow Jones Industrial Average to cement his claim to doing well in his new job is flawed. This is both for reasons relating to economic unsustainability, and also because the Dow doesn’t actually tell us how the economy performs all that well. On another, slightly related note, this sort of issue is why I think that the backlash against experts these days is so unhelpful. The things I’m saying here would be much more credible if an actual expert was saying it, but without experts there are no credible voices to inform people that their President may not actually be doing the wonders for the economy that they think he is. I sincerely hope that in the future we can arrive in a world where experts are given the respect they deserve, and are able to call out any figure for saying something potentially wrong without being disregarded because they can’t predict a world that is fundamentally unpredictable. Without it, well, we’ll have lost one crucial, perhaps vital, check on people in positions of great power.

Microfinance and its challenges

The blog is two years old today! Thanks everyone for all the support 🙂

Photo Credits: Jaimoen87 on WikiCommons License: Creative Commons Attribution-Share Alike 3.0 Unported

Microfinance in recent years has been touted as one of the most potentially effective poverty alleviation programs in the developing world. From the humid paddy fields of Bangladesh to the cluttered squalor of rural India, the bottom-up approach to economic development has indeed proved both efficient and successful in combating the wide variety of issues faced by those living in absolute poverty. Essentially, what this global game-changer is is an access path to financial services for those in poverty who lack many of the things that make people (or businesses) successful debtors (such as a verifiable credit history). This could help them lift themselves out of the poverty trap, for example by providing the funds to help them start start successful businesses. When Muhammad Yunus came up with the idea during a 1970s Bangladeshi famine, however, he had, by his own admission, never thought that the greed of man could turn his brainchild into just another failed poverty alleviation plan. Of course, in addition to this, there’s a variety of reasons why the programme doesn’t work perfectly, the most important of which I’ll go through in this article. Despite this though, it has to be said that despite its flaws, microfinance has “changed the game”, so to speak, and is by far one of the greatest ideas, in my opinion, in recent economic thought. With the right economic agents involved, it could still be a major warrior in the fight against absolute poverty in the developing world, however, it will need to surmount some obstacles first.

To provide some context, let’s take the perspective of Afghanistan, one of the poorest countries in the world. In Bamiyan, about 240 km northwest of the Afghan capital, Kabul, a field study microcredit initiative was put in place, whereby low-interest small-scale loans were provided to impoverished Afghans in the hope that they would spend the money in such a way that they were pulled out of the clutches of the poverty trap. Alas, even though a strong potato crop within the area would provide a promising source of growth for any business set up using microcredit funds, the funds were disappointingly used partly by the Afghans to finance consumption. While you might think of this as simply a strange Afghanism, such phenomena have been witnessed all across the developing world, and when one thinks about it, it makes quite a bit of sense. When you’re in that type of situation with barely enough funds to ensure your next meal, it’s natural that any injection  of cash would be used to ensure that you’re able to fund consumption of all your necessities. In addition to this, not everyone is an entrepreneur; not everyone possesses the set of skills to turn a theoretical business plan into a workable business model and not everyone is willing to take the risks that an entrepreneur takes. Hence, the notion of microcredit, and microfinance in general that everyone can become an entrepreneur is slightly flawed and something which has a large negative impact on the potential effectiveness of microfinance to pull people out of the poverty trap by facilitating entrepreneurship.

While the microfinance initiative aforementioned in Afghanistan was only a pilot study, another significant drawback of microfinance is its potential inability to secure the low interest rate loans that are so critical to its success. This is because many of the areas which microfinance targets are rural and therefore hard to reach. Actually reaching these areas both to administer loans and enforce their repayment would take a large investment in both physical and human capital, something which raises the cost of making loans and therefore (assuming microfinance firms are profit minded as well as socially conscious) increases the interest rate which these firms have to charge in order to generate their target return on investment. The loan sharks who charge exorbitant interest rates to impoverished rural dwellers suddenly now look not too different from the microfinance institutions themselves, with the two now differing in intention only (and perhaps a few percentage points on the sky-high interest rates offered). Although the economies of scale generated through lending to a group of people at once go some way towards mitigating this, even slightly lower interest rates than aforementioned would be hard to repay for individuals who often have irregular income flows and don’t earn all that much in the first place.

Even though the previous two points are entirely valid when looking at the viability of microfinance to meet its end objectives, the idea definitely still has some merit. Alas, when implemented in real life, it fell flat due to economic agents (namely firms) acting in their own self-interest. Of course, the firms I’m talking about are the large banks that to a large extent caused and amplified the huge negative impact of the 2008 financial crisis on the global economy. Banks have taken over the microfinance scene in recent years and charge rates of 100 percent or more to impoverished borrowers who obviously don’t have any chance of repaying loans at these huge interest rates. The idea that the majority of institutions offering microfinance facilities could be both socially and profit driven has therefore been shown to be untrue in reality, as these large banks seem to only desire profit above the social and economic betterment of their poor debtors. While regulation in disadvantaged areas remains tenuous at best and extremely difficult to implement, profit-driven institutions take advantage and reap massive profits at the expense of clients. Therefore, they represent a massive blockage to the road which microfinance could have taken to drastically reduce global poverty rates. It is hence my opinion that only once banks’ motives change, or banks are purged from the microfinance system altogether can microfinance continue to transform lives at the breakneck pace it once did.

This’ll be difficult, but it’s worth it – ideas like this one don’t come about all too often.

Why, for me, the euro has and will continue to fail

Photo Credits: Ottmar Hörl License: CC BY-SA 3.0

Whatever your views on the euro, it’s clear to see that it isn’t in the best of places right now.

Really, it’s a culmination of a number of things that have led to its current malaise, starting from when the concept was first introduced, all the way back in 1993. Six long years and stern British and Danish opposition followed, but on New Year’s Day in 1999, the single currency went from a theoretical concept to a practical reality. It was even used by every country in the then EU apart from the UK and Denmark, who still now have a fixed exchange rate with it. Under the control of the Frankfurt-based European Central Bank, the euro has grown to become the world’s second largest reserve currency, and ECB decisions affect directly 340 million people across the globe. Given all this, the fortunes of the euro take on that much greater global significance worldwide, which is why it’s crucial that it finds its way out of the doldrums or ceases to exist altogether. Draghi and his team have tried to find a way to accomplish the former, however their measures haven’t gone nearly far enough to soothe the economic pain of oh so many. For me, this is because the euro in its current state is fundamentally unworkable; it cannot exist without imposing massive economic damage to a large proportion of its users. Here’s why.

Firstly, what the euro is trying to do is apply uniform monetary policy to a number of different states with different economies and different concerns that need to be assuaged. What this, of course, means, is that some policies will definitely not fit the needs of what some countries desire. As the former Bank of England governor Mervyn King claimed in his first book The End of Alchemy, the discontent caused by some nations having to bail out others (such as Greece recently) for what could be plain fiscal irresponsibility “may become too great to remain consistent with political stability”. I would argue strongly for this, extending on King’s point that this monetary union creates conflict between a “centralised elite” on one side and the “forces of democracy” on the other. Furthermore, I am of the belief that to stop King’s suggested wave of discontent, the only long-term sustainable option available to European policymakers is to bring together these countries in a fiscal union, and thus let the centralised elite coordinate the synergy of fiscal and monetary policy to what they believe to be the best interests of all parties involved. Obviously, there exists a problem with this: the backlash of the masses against what they perceive to be a moneyed elite. We’ve seen this with the famous Brexit and Trump’s election, so even this option presents substantial political risk that could, in my opinion, bring down this monetary union altogether. As we’ve seen here, there really isn’t a path which the EU can go down with this that doesn’t lead to some sort of political backlash or economic hardship: both of which could prove treacherous for the European establishment.

This point also becomes important when you have exogenous shocks affecting economies that cannot use their monetary policy tools to combat them. For example, the European Central Bank has set an interest rate of -0.40% on reserves, which in theory, should stimulate investment and economic growth within member economies. Setting aside the fact that the interest rate channel has proved relatively ineffectual in Europe till date, if it does indeed stimulate growth in a Eurozone economy, what happens if this economy overheats? The natural response would be to encourage saving by raising interest rates, however who now has the power to do this? That’s right: the European Central Bank. This also happens to be an institution who has to take into account the needs of the other tens of countries that happen to be at its monetary mercy, and when you have such an arrangement, be sure that the ECB’s decisions won’t always be what you need. This just makes a potentially negative situation that affects Europe worse, not just for the directly affected country, but for the Europe as a whole. This is because worsening economic conditions within a country could reduce consumer spending and aggregate demand for goods and services within that country and hence worsen export markets for other European countries. The excessive interconnectedness shown here acts as an amplifier that could shave down both European growth and that of the wider world.

However, it’s still possible that through some economic masterstroke, European policies largely benefit a majority of EU states. That’s one route of salvation for the EU, right? Unfortunately, as so occurs when one contrasts theory with reality, it doesn’t seem like this is anywhere close to a reality. Independent research has time and again proven that European austerity breaks the backs of Eurozone countries and further dampens private spending and investment. It seems that senior European policymakers do not see eye-to-eye with many academic experts (such as the famous Stiglitz) on the issue, and hence European growth continues to stagnate. While this is due in part to demographic decline, the lack of jobs in these advanced economies have led to youth unemployment being more than 50% in countries like Spain. When you combine European incompetence with the fundamental unworkability of uniform mass monetary policy, what you get is a concoction that proves so toxic for European economies.

That’s why, for me, the euro can’t work.

 

The EU needs to change. Here’s how

It’s the 1st of January, 2002. 12 European countries have officially began to use Euro notes and coins as legal tender. It was seen by some then as a sign, a sign of the peace and togetherness which being a member of the European Union engendered, and a sign of the success which the European Union was enjoying.

Oh, how wrong those people were.

Since the beginning of 2002, 7 more countries have joined the eurozone, Greece has gone back and forth from the depths of economic hell, and a refugee crisis has threatened the very fabric of what the EU stands for.

Oh, and there was that whole Brexit thing.

It’s not an exaggeration in any sense of the word to state that the past few years have been eventful for the EU. However, in truth, much of the blame for the EU’s tumultuous past lies squarely on the shoulders of the EU itself. From the sheer stupidity of the idea of uniform monetary policy for almost 20 countries to the EU’s resistance to compromise with member states on almost anything, it’s fair to say that the organisation has not done itself any favours recently. However, the Union’s death-knell has not come yet. It is possible that if the EU introduces key reforms in significant areas, they could snatch stability from the jaws of disintegration. However, these reforms need to be sweeping, and come sooner rather than later, starting with the abolishment of the eurozone entirely.

Essentially, what the eurozone is is a monetary union which currently comprises 19 of the 28 EU member states; intuitively, all of these countries therefore use the euro as their currency. The monetary policy of the eurozone countries is decided by a large organisation known as the European Central Bank (or ECB). You might already see what the problem with this is, which is that a one size fits all policy cannot possibly work with 19 different countries with completely different economic and financial circumstances to each other. Whilst globalisation has made these countries more interconnected than ever before, there still remain considerable differences; one wouldn’t liken the financial situation of Greece to that of Germany, for example. If one country’s central bank heads wanted to raise interest rates, they likely couldn’t get the ECB to; it has the interests of 18 other countries to think about as well. The result of this is lacklustre growth, accompanied by growing discontent within the eurozone directed towards the ECB, and each other for acting as barricades to collective success. Therefore, the EU is left with two possible choices: ditch the euro, and let each country’s central bank dictate monetary policy, or take control of the fiscal policy of each eurozone country themselves. Given the large political and diplomatic consequences which the latter would have, it would be wise, nay, essential for the euro to go, leaving each country to synergise their own fiscal and monetary policies, facilitating the increased growth and prosperity of these countries and therefore the EU as a whole.

Moreover, the arrogance of the EU in forcing austerity upon countries such as Greece to meet their budget deficit targets, when these countries are already in recession, is confusing at best and asinine at worst. Austerity during a period of recession simply dampens consumer confidence and spending even further, creating a negative cycle of economic contraction and reduced prosperity. Proponents of Keynesian thought here would say that what Greece and countries like it require would be large fiscal stimulus packages to help trigger a positive multiplier effect and bolster the economy through long run economic growth. Having not followed this route, Greek annual economic growth rates are still firmly negative, and showing no signs of changing anytime soon. Had Greece not gone down the road of austerity, it could have potentially trimmed its budget deficits during a period of growth, rather than shatter consumer confidence and therefore any prospect of economic growth in its short-term horizons. For the EU to not see this, even now, is hinging on delusional and suggests that they see their ideas as worth more than recent evidence; the last thing you want from a respectable political institution. This arrogance and blind faith in the powers of austerity needs to go, and soon.

Complementing this arrogance is a string of inefficient directives and rules that have misallocated funds and endangered key sectors of European economies. For example, the famous CAP (Common Agricultural Policy) regulates price levels of food, artificially inflating them and therefore resulting in an oversupply and wastage of food. Arguably, some EU legislation introduced such as this is counterproductive rather than constructive, and the EU member states would do better without it. Granted, almost all countries have that element of bureaucracy within themselves, but if the EU wants to go back to competing with the likes of America, China and India on the global stage, it needs to cut down on these regulations to ensure the most efficient allocation of resources possible within its borders. Compared to its euro and austerity problem, however, this is relatively minor, and should the EU change its policy stance drastically in the way outlined here, it could potentially live to see another day. If not? Well, let’s just say that the dream of EU economic prosperity could be just that, a dream, shunned from the gates of reality by its own stupidity and stubbornness.

The choice is theirs.

How will Obama be remembered?

This image is licensed under the Creative Commons Attribution 2.0 Generic license – The photographer is Will White.

On January 20, 2009, the United States of America finally turned its back on George Bush and appointed Barack Hussein Obama as their 44th President. At the time, it was looked at as a landmark occasion; the first African-American President in the history of the most powerful country in the world. Many now say that this victory for equality has been overshadowed by backwards, regressive policy that has gone against the very agenda of progressivism that Obama stood for election for. However, others instead espouse the idea that Obama has laid the proverbial stepping stones for future progressives to unite America through economic policy. Regardless of whichever side you take, it’s undoubtable that the Obama administration has divided opinion like almost no other in contemporary politics and economics. Obama’s tax cuts for the wealthiest in society are something which have been campaigned for by many in the past, but some on the left side of the spectrum still regard him as far too business-friendly to be in any way compatible with the vision of equality for all Americans. In this regard, many of his policies have not necessarily been the most popular, yet it is still important to take into account the economic climate which the 55-year-old inherited from his Republican predecessor; the images of widespread depression and angst certainly add context to the debate, context that is needed when analysing any presidency from an economic perspective.

Today, in a global economic environment of stagnation and extraordinarily low interest rates, many are justified in claiming that we have never really escaped the proverbial wreckage of the Great Depression. Yet more economists than not claim that Obama’s Keynesian fiscal stimulus package to the tune of $787 billion, largely in the form of tax cuts to families, was instrumental in making sure that America did not stuck in a period of prolonged economic stagnation, amidst an environment of lesser trust in the prospects of the economy, and therefore less investment. According to James Feyrer and Bruce Sacerdote of Dartmouth College, the multiplier effect (the increase in final income arising from any new injection of spending) was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and finally in the range of 0.47 to 1.06 for stimulus as a whole. While this was not the only study carried out on Obama’s fiscal stimulus package, the methodology of the survey the two economists used is significant because they not only compared employment growth at state and county level, but they also compared month-by-month data to see how employment figures were changed at the point when the stimulus was injected into the economy. The significant upward trend generated by the stimulus here is thereby significant as it supports heavily the claim that the package was needed in order to usher America out of the stagnation that it previously endured; so Obama doesn’t seem to have done too badly so far.

The Dodd-Frank Financial Reform Bill also was a significant piece of legislation that Obama signed during his presidency. Described by the Washington Post as “the most ambitious overhaul of financial regulation in generations”, there’s no denying that the Bill has had and will continue to have significant effects on the way financial firms think about their operations going forward. However, it does not ameliorate the problem of the massive moral hazard which banks are allowed to possess when analysing whether to cut down on their portfolio risk or not. In the former Governor of the Bank of England, Mervyn King’s book “The End of Alchemy: Banking, the Global Economy and the Future of Money”, King argues that this is precisely what could lead to another catastrophic recession, and argues instead for a “pawnbroker for all situations” solution, one in which banks have to take significant measures before having any chance of being bailed out. Whilst I would suggest that one reads King’s book for more insight into this claim, the fundamental underlying principle is that banks will take risks if you allow them to, putting taxpayers at risk of having to bail them out once again, and for this reason, I argue that the legislation Obama approved has not gone anywhere near far enough.

And now we come to perhaps the most contentious issue of all: Obamacare. Although the program still has its glaring faults and areas where it should really be improved in order to improve the accessibility of healthcare for every American, it has to be said that the healthcare program has had overwhelmingly positive effect. For example, businesses with over 50 employees are required to have a health insurance program, with tax credits for these businesses also being put in place to help them finance this program. In my opinion, this strikes a near-perfect balance between stamping the need for increased healthcare coverage for the most vulnerable members of society and easing financial constraints on business, allowing these firms to flourish and expand their operations. If I had to summarise Obama’s economic policy in a few words, I’d use the phrase “getting there”. Whilst the African-American has made key policy moves that have steered America in the right direction, there are still large gaps that need to be filled and policy moves that need to be implemented to progress America’s economy further. He hasn’t done it all, but he’s definitely laid the foundations.

Shrey Srivastava, 16

Traffic jams: An economic perspective

You know the feeling.

The skies are grey, and fat drops of rain batter your windscreen: it’s almost as if the sky’s crying for you. You’re stuck in a sandwich of motorised vehicles – progress only comes a few inches at a time, slowly but not always surely. You curse as the faint hope you had of speeding ahead is dashed, falling away like droplets from the sky.

But then, after long hours of waiting, it happens. One car edges ahead, then another, then another. Finally, it’s your turn; your car moves forward, breaking the seemingly endless deadlock. It’s emotional catharsis the likes of which you can only experience after hours of frustration. Finally, you’re home, free from the scourge of traffic (until next morning, at least).

When the adrenaline rush wears off, though, you realise that you just wasted precious hours of your life that you’ll never get back. You could have spent that time watching television, playing chess, or even working more if you had to. In addition to the emotional outrage faced by many drivers across the planet, this congestion also has severe economic consequences for car-owning households. According to The Economist, traffic jams cost Los Angeles $23 billion a year, and that isn’t even when we take into account environmental impact. But why exactly do traffic jams happen, and what exactly can we do about them?

Well, part of the blame for traffic jams lies squarely on the shoulders of the people themselves. Public transport in the form of predominantly buses is a “key mode of public transport for those on low incomes”, according to Transport for London. As incomes go up, naturally the proportion of people using public transport in a particular country will decline. Don’t believe me? Hear me out. Public transport is an inferior service, which essentially means that demand for it decreases as consumer incomes go up. This is natural, as cars are inherently more prestigious than buses or trains; they grant you a degree of privacy and exclusivity, and they almost always look better. Therefore, you’d expect that as people become more affluent, more of them will ride in cars and other private forms of transport. Still don’t believe me? Look at the UK. According to the BBC, the number of cars on the streets of Britain rose by almost 600,000 in one year, with the average weekly wages in the United Kingdom also steadily rising. In this case, the correlation implies a heavy degree of causation. What can be done about this? In truth, not much; people’s opinions are not going to radically change. We could, however, simultaneously create more low-skilled jobs in the cleaning sector and clean up our public transport, which appears to be surprisingly dirty. Cleaning up and renovating some of our aged public transport, thereby making it somewhat more prestigious, could go some way to dampening the tradeoff between consumer income and public transport use, although, admittedly, the effect probably won’t be too drastic. It would help though, so why not try it?

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Improving the quality of public transport could diminish the correlation between income and car use. PHOTO CREDITS: Route 79

It’s also important to consider that as of right now, roads are mostly free at the point of use across the world. Therefore, many people see the use of roads as a given: something for which there is no cost. Hence, the number of cars on the road are surging, as the only thing people actually have to pay for is the payments associated with the car itself and fuel. If governments around the world could somehow introduce a system whereby people are charged for the duration of time that they spend on the roads, demand for cars would fall due to increased price leading to a decrease in quantity demanded, as per the demand curve. This is because an increase in the cost of driving means that for more and more people, the marginal utility gained by using a car is offset by its substantial total cost (in layman’s terms, it costs more than it’s worth). Although this would lead to potential job losses in the auto manufacturing industry, it is necessary to carry out to offset both the economic loss of productivity and the severe environmental damage on air quality caused by traffic jams. In short, while painful for one industry, we need to do this for the greater economic and environmental good.

While campaigns encouraging walking, cycling and use of public transport are almost ubiquitous in today’s world, and have no doubt had their effects, more still needs to be done in order for the prevalence of cars on the roads to decrease dramatically. The difficulty of cycling is one factor why for many, the utility gained in terms of exercise and fitness is less than the cost, in terms of their commute becoming drastically longer and also the safety risk that it entails. What I am proposing to solve this is to build more cycle lanes next to roads, thereby increasing their supply. The increased ease by which many can now find an easy way to cycle to the workplace would decrease the costs of cycling, thereby making the utility/cost tradeoff more favourable, hence spurring demand for bicycles with which to cycle to work, potentially helping the cycling industry also. Given that these cycle lanes take up considerably less space than new roads would, they are both a quicker and more effective solution to the problem of traffic congestion (the increased supply of roads would simply spur demand for cars in the same way as demand for bicycles is spurred above).

Applying economics to the problem of traffic congestion may seem unorthodox at first, but I am convinced that inherently, many of the world’s problems are economic. After applying economics to this situation, it’s entirely possible that you may just spend less time stuck on the roads.

Agree? Disagree? Please leave a comment below, whether you’ve been attracted or repulsed by my ideas.

 

How could we curb Venezuela’s hyperinflation?

Think of a note worth 10,000 bolívars. That seems like a lot, right? I’m a nice guy; I’ll give it to you. Go buy yourself a nice TV or something.

What’s that? They said you don’t have enough money?

Precisely.

As of July 27, 2016, this seemingly valuable note is worth just over ten dollars (it’s almost definitely worth less by the time you’ll read this). In the UK, it wouldn’t be enough to buy you a takeaway dinner. This is because of the rapid hyperinflation that’s occurring in the South American country, leaving it in a tumultuous spiral of poverty, with some not even having enough to pay for essentials such as food or heating. A recent Bloomberg report even suggested that the Venezuelan government is running out of money to print money, such is the state of the country. An analyst at Nomura even predicts that a $200 oil price is needed before the Venezuelans can balance their budgets. Estimates for the rate of decrease of prices range from 400% to 720%, meaning that Venezuelans are eager to spend their money before its worth dramatically decreases just a few weeks later. It seems that policymakers are unable to come up with a solution to the problems that Hugo Chávez’s government largely created. Is the country doomed?

Not quite.

The Venezuelan government needs to learn from the lessons of German, Zimbabwean and Brazilian hyperinflation in order to put a stop to the inflationary pressure that has roiled its economy. Fundamentally, the problem is that, due to the pegging of the bolívar against the dollar, there is an “official” exchange rate of bolívars to dollars, and then there is a black market rate, which is a cause of the hyperinflation. Officially, the bolivar trades competitively against the US currency, however on the black market, it is estimated that 10,000 bolívars are worth just over one dollar. The solution? Officially unpeg the Venezuelan currency from the dollar, and allow it to float freely, so that both the government and the people of Venezuela are on the same side: there is now only one exchange rate, and this makes the problem much easier to solve – we need only one bullet, rather than two, so to speak. In addition, this allows Nicolas Máduro and his government to significantly reduce their fiscal deficit, that came about through them getting significantly less bolívars from overseas for every unit currency than the people got through black market transactions using the unofficial exchange rate.

Now that we have a reduced fiscal deficit, the Venezuelans need to stop printing money in order to finance deficit spending. This would stabilise the aggregate money supply in the economy, reducing the potential for a further reduction in the value of money. Logic dictates that the reduced inflation will disincentivise Venezuelans from spending their money in anticipation of a coming decrease in value, which would in turn lead to an increase in savings. Aggregate demand for goods and services would therefore reduce, causing a corresponding decrease in demand-pull inflation (inflation as a result of aggregate demand outmatching aggregate supply). This leads to a continuous cycle whereby more and more people save more and more money rather than investing it, and combined with the stable money supply, inflation will continue to decrease. Years of hyperinflation have battered the Venezuelan people’s expectations, however, so it may take a long time for them to be convinced that their currency will hold its purpose as a store of value, enabling inflation to decrease substantially. While this may allow the national debt of the country to increase, it is a price worth paying for the country to return to a period of long term economic sustainability, during which tight fiscal policy (increasing taxes and cutting government spending) can help bring this debt down.

The final prong of this three-pronged attack on inflation is that when inflation decreases substantially, the likelihood is that it will still be relatively high; inflation ranging from 400% to 720% can’t simply be swatted away. Therefore, the government needs to maintain interest rates at a level such that the nominal interest rate is far higher than inflation, causing the real interest rate to be high and positive. Intuitively, this means people will see it as beneficial to further save their money rather than invest it immediately, curbing the cycle that increases demand-pull inflation. As the rate of inflation continues to decrease, the central bank should gradually decrease nominal interest rates, while keeping them high above inflation, until they have reached a level of inflation that they see as sustainable, at which point real interest rates could potentially come down.

The sad state of Venezuela is a reminder of the dangers that letting inflation go out of control can provide; Hugo Chávez has failed his country immensely. Despite this, the policies outlined above should go a long way to cut out the plague of hyperinflation, and restore peace and prosperity to the Venezuelan people.

What do you think?

Shrey Srivastava, 16

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